US life insurers' interest maintenance reserve falls to lowest point since 2011

US life insurers' aggregate interest maintenance reserves fell in the second quarter of 2023 to the lowest level since 2011, but recent regulatory changes signal that some relief is on the way.

The total interest maintenance reserves (IMR) liability for life sector general accounts fell to $12.20 billion as of June 30, down from $19.18 billion at year-end 2022.

Realized capital gains and losses on bonds due to changes in market interest rates are deferred to IMR under statutory accounting rules and are not immediately recognized in income or surplus. To the extent those deferred losses reach such a level that the IMR balance turns negative, it is then recognized as a non-admitted asset and negatively impacts capitalization.

In some cases, US insurers have been willing to sell lower-yielding bonds that declined in value in order to take advantage of significantly higher rates, but while that seems beneficial to their long-term financial footing, the IMR accounting rules prior to the recent changes would have caused a negative near-term impact to capitalization.

Changes to negative IMR

During the National Association of Insurance Commissioners (NAIC) summer national meeting, regulators met and made changes to how insurers are able to treat negative IMR, offering some potential relief to insurers.

The NAIC Statutory Accounting Principles Working Group adopted Interpretation 23-01, its Net Negative (Disallowed) Interest Maintenance Reserve, which provides optional, limited-time guidance allowing the admittance of a net negative interest maintenance reserve up to 10% of adjusted capital and surplus.

In a Sept. 6 KBW conference presentation, Unum Group CFO Steve Zabel called the new NAIC-approved proposal "helpful" since it allows insurers to admit negative IMR generated from taking losses and selling out of its portfolio up to a limit that is set based on the amount of surplus that the legal entity has.

"So that does allow you, given where interest rates are today, to sell out of positions that maybe are shorter duration and a loss, and not have to take the upfront capital impact of that," Zabel said.

Zabel noted that negative IMR is not an issue for Unum at the moment.

The interpretation will be effective until Dec. 31, 2025, and automatically nullified Jan. 1, 2026, although the effective date could be subject to change.

Largest IMR

As of June 30, The Northwestern Mutual Life Insurance Co. held the largest negative IMR among US life insurers, with its reserves sitting at negative $1.73 billion. The insurer entered the negative IMR as a contra liability.

The Wisconsin Insurance Commissioner had granted Northwestern Mutual a permitted accounting practice effective Dec. 31, 2022, that allows for the admissibility of a net negative IMR balance.

Northwestern Mutual deferred $1.95 billion of net realized capital losses to the IMR during the first half of 2023 on a pretax basis.

Prudential Financial Inc.'s subsidiary The Prudential Insurance Company of America had the second-largest negative calculated IMR among life insurers' general accounts at negative $1.05 billion as of June 30. The life insurer reported its IMR as a non-admitted asset.

The proportion of US life insurers with negative interest maintenance reserve balances more than doubled during 2022 as interest rates rose.